The FBI has expanded its investigation of fraud in Louisiana’s film tax credit program, scrutinizing a Baton Rouge producer suspected of playing a role in a scheme to bilk the state by reporting inflated production costs.
The producer, George M. Kostuch, founder of K2 Pictures, appears to have been implicated by two filmmakers who pleaded guilty to federal wire fraud charges last year and have cooperated with the FBI. Kostuch has not been charged.
In a case that illustrates the ways in which the tax credit program can be gamed, the convicted filmmakers, Matthew Keith and Daniel Garcia, have outlined for the authorities a web of deceit in which accounting records were falsified to make overstated movie expenses appear legitimate when scrutinized by an independent auditor and the Louisiana Department of Economic Development.
“The conspirators were able to carry out the scheme on the motion pictures ‘Xtinction: Predator X,’ ‘Sports Trivia Clash’ and ‘Mysterious Island,’ ” FBI Agent Joshua Morrill wrote in an application for a search warrant that sought permission to review Kostuch’s emails. “The conspirators attempted to defraud the state of Louisiana through the film ‘Paranormal Plantation’; however, the inflated expenses were denied by (the Department of Economic Development) during the certification process.”
Morrill listed Kostuch among the group of “conspirators,” saying Kostuch not only was aware of the scam but took an active role in it by inducing a contractor to bill an inflated amount for construction on the set of “Sports Trivia Clash,” a game-show series that qualified for tax credits.
Under the state’s program, Louisiana taxpayers cover 30 percent of any film production’s in-state costs, provided they total at least $300,000.
If true, the feds’ allegations would result in yet another black eye for a controversial program that, because of its generosity, has made Louisiana the nation’s busiest filming locale. About a dozen people have faced federal fraud charges in connection with the film program, including its original architect, former state official Mark Smith.
The generosity of Louisiana’s film program may be one reason it has been abused. With the state picking up 30 cents of every dollar moviemakers can show they spent, creating a false paper trail to inflate spending has proved tempting to some of those who have sought the tax credits.
That’s what happened in this case, according to Morrill’s affidavit. The agent wrote that Keith and Garcia, who have yet to be sentenced, singled out five transactions in “Sports Trivia Clash” that were designed to inflate the film’s costs, causing the state to issue $194,500 of inflated tax credits.
The search warrant, filed earlier this year in U.S. District Court, highlighted one of those transactions: Kostuch’s hiring of Zack Gyler, a contractor brought on for $7,000 of work on the “Sports Trivia Clash” set.
Morrill wrote in the warrant that “false invoices were created and delusive financial transactions were executed to establish the appearance to both the independent CPA and (the state) that the work was completed at a cost of $89,000.” In an effort to disguise the actual film costs, Morrill added, money was moved “in a circular manner” through several accounts. Morrill also wrote that he had probable cause to believe Kostuch committed wire fraud.
Before a business can qualify for film tax credits, state law requires that production expenditures be audited and certified by an independent accountant. The credits, once approved, may be claimed as a direct refund, applied against state income tax liability or transferred or sold by a motion picture company.
Clint Mock, the auditor who examined the expenditures for the production of “Sports Trivia Clash,” said the allegations described in the FBI search warrant suggest a “very complex collusion scheme.” He said he stands by “every stitch” of his auditing for the show, adding that he went as far as to obtain photographs of the set in his efforts to vet financial transactions.
“There’s nothing that a standard audit can do to discover this,” Mock said when asked how he could have been duped. “The intent is to deceive, and that’s what’s causing the trouble. This is about as creative as it gets.”
Mary Beth Romig Haskins, an FBI spokeswoman, confirmed Friday that the agency’s investigation remains ongoing.
Kostuch, who according to his website has produced “nearly 20 films since 2005,” declined to comment Saturday.
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